The share price of Lloyds (LSE: LLOY) has risen by around 10% since the start of the year. This may signal to some investors that the bank is due for a fall, especially given the uncertain outlook faced because of Brexit. However, the reality is that the bank’s share price could move significantly higher. It could even reach 100p over the medium term.
Improving business
Lloyds may have required state aid less than a decade ago, but it is very much back on track when it comes to financial health. Its strategy has been a key reason for this and it could prove to be a positive catalyst in future too. The bank’s management team has made asset disposals, reduced headcount and focused on opportunities which have the best risk/reward ratio. As a result, it has successfully reduced the risk of its asset base, and this has left it with a more stable and consistent performance.
Looking ahead, there is more scope for improvement in Lloyds’ cost-to-income ratio. It is targeting continued reductions over the coming years. Already, it performs relatively well when compared to industry rivals based on efficiency, while recent stress tests showed its ability to survive a downturn could be higher than the market is currently pricing-in. As such, investor sentiment in Lloyds could improve and push its share price higher.
Income potential
Inflation has already reached 1.8% and is expected to move closer to 3% by the end of the year. This could cause difficulties for income investors who are seeking to maintain an income which is ahead of inflation. In this regard, Lloyds could become increasingly popular among investors. Despite being expected to pay out just 53% of profit as a dividend this year, the bank is forecast to yield 5.4%. That’s around 140 basis points higher than the FTSE 100’s yield and it could move higher in future years.
In fact, in 2018 Lloyds is forecast to increase dividends per share by 17%. This puts it on a forward yield of 6.3%, which is among the highest yields in the FTSE 350. This suggests there is upside potential on offer on valuation grounds. If Lloyds traded at 100p per share, it would still yield 4.3% from a dividend which is well-covered by profit. As such, it would not appear to be a particularly optimistic or unrealistic price target.
Outlook
Clearly, the future for UK-focused banks is uncertain. The global economic outlook is arguably more difficult to predict than ever. This could lead to a variety of trading conditions for Lloyds in a relatively short space of time. However, since it has a sound strategy through which to become financially stronger and more efficient, it should perform well on a relative basis. And with such bright income potential, it is not difficult to justify a 100p price target. This could come as soon as later this year, given the right trading conditions and investor demand for higher-yielding shares.
